Clothing chain GAP Inc (GPS) announced its plans to create two independent publicly traded companies — family apparel entity “Old Navy” and a yet-to-be christened company that include the Gap brand, Athleta, Banana Republic, Intermix and Hill City. GAP Inc shares soared in after-market trade following the announcement.

The company said in a statement that it “expects to effect the separation through a spin-off that is intended to generally be tax-free to Gap Inc.’s shareholders for U.S. federal income tax purposes.”

Upon the split, GAP Inc shareholders are expected to receive a pro-rata stock distribution and as a result, own shares in both the new yet-to-be-named company and Old Navy in equal proportion.

GAP inc CEO Art Peck will hold the same position with the new company, while Old Navy CEO Sonia Syngal will continue to lead the brand as a standalone company.

Old Navy to become a standalone company

AlphaStreet became aware of the announcement through Twitter. “Today we announced that Gap Inc. will be separating into two independent, publicly traded companies: @OldNavy and a yet-to-be named company “NewCo” (@Gap, @Athleta, @BananaRepublic, @Intermix and @HillCity),” read a tweet in after-market hours by the official Twitter handle of GAP.

Gap Inc.’s Board Chairman Robert Fisher weighed in, “following a comprehensive review by the Gap Inc. Board of Directors, it’s clear that Old Navy’s business model and customers have increasingly diverged from our specialty brands over time, and each company now requires a different strategy to thrive moving forward.”

“Recognizing that, we determined that pursuing a separation is the most compelling path forward for our brands – creating two separate companies with distinct financial profiles, tailored operating priorities and unique capital allocation strategies, both well positioned to achieve their strategic goals and create significant value for our customers, employees and shareholders,” he added.

 

FOURTH QUARTER RESULTS

Right after the split announcement of Old Navy, GAP Inc (GPS) posted its fourth-quarter 2018 earnings after the closing bell on Feb. 28.

Earnings grew to 72 cents from last year’s $0.52 per share. Net sales slipped to $4.62 billion per share for 13 weeks ended Feb. 2, 2019 — vs. $4.78 billion in 14 weeks ended Feb. 3, 2018.

The Street expected 69 cents in earnings per share on revenue of about $4.7 billion.

Gap Inc Q4 Earnings Infographic
Gap Inc Q4 2018 Earnings Infographic

The company’s fourth-quarter comparable sales were down 1%, compared with a 5% increase during last year’s corresponding 13 weeks.

GAP Inc ended the quarter with about $1.4 billion in cash, cash equivalents, and restricted cash, along with $288 million of short-term investments.

 

LOOKING TO 2019

GAP Inc also announced its fiscal 2019 outlook, with reported earnings expected at $2.11-2.26 per diluted share. Excluding the estimated costs related to the Gap brand fleet restructuring, diluted earnings per share is expected to be $2.40-2.55.

The company expects comparable sales to be flat to up slightly, while looking to repurchase about $200 million in the fiscal year. Capital spending for the period is touted to hit $750 million, including about $100 million of expansion costs related to a headquarters building and a buildout of its Ohio distribution center.

“In addition, at the beginning of fiscal 2019, the company entered into an agreement to purchase its Old Navy headquarters building and anticipates selling another property during fiscal 2019. The company expects a net cash outflow of about $100 to $150 million related to these real estate transactions,” read a company statement.

GAP Inc looks to shutter about 50 company-operated stores, net of openings and repositions in the fiscal year 2019. According to the fashion giant, this guidance includes about 130 closures related to the Gap brand fleet restructuring announced on Thursday.

 

RESTRUCTURING AND CLOSURE

GAP Inc on Thursday also announced a plan to restructure its specialty fleet, This including shutting down about 230 GAP specialty stores over the coming two years.

The fashion giant expects an annualized sales loss of about $625 million due to these store closures.

GAP also estimates these actions to rake up $250-300 million in pre-tax costs — mostly cash expenditures. The company, however, expects these would also result in annualized pretax savings of about $90 million.

 

REPURCHASING CUSHION

Earlier this week, GAP’s board of directors authorized the repurchase of $1 billion shares. This move replaces its existing program. Along with the repurchase, the fashion retailer also announced that it would maintain an annual dividend of $0.97 per share in fiscal 2019 — this works out to 24.25 cents per quarter.

According to GAP, the Q1 2019 dividend is payable on May 1 to shareholders of record as of Apr. 10. This goes in line with the company’s disciplined capital-allocation history while maintaining a strong balance sheet.

Back in the third quarter of 2018, GAP bought back 3.6 million shares for about $100 million, while paying dividends of about 24.25 cents per share.

 

 

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